90 seconds at 9 am: Bond yields fall

UST 10yr 2.54%, gold and oil higher, US inflation pressure up, ECB prepares for stimulus; PBoC acts on housing; NZ$1 = US$0.867, TWI = 80.6

15th May 14, 7:30am by David Chaston

Here's my summary of the key news overnight in 90 seconds at 9 am, including news of sharply falling bond yields overnight.

In late trading today in New York, the UST 10yr benchmark bond yield has fallen heavily, down about 8 bps to 2.54%. That will have a strong impact on our swap rates when trading starts in New Zealand.

Both oil and gold are higher, with gold now up to US$1,305/oz. US equity markets are down, off of yesterday's highs.

US producer prices came in higher than expected, suggesting inflation pressures are building in the American economy. They were up 0.6% in April following a 0.5% rise in March.

And in Europe, the ECB has given some strong signals it is about to buy Government bonds. The German central bank has said it supports the move for a more aggressive approach to European stimulus. And the British said overnight they are not rolling back their low rates and huge bond buying program while there is so much slack in their economy.

US crude oil production climbed to a 28-year high last week as the shale boom gathered momentum.

In China, their central bank is moving to try and ameliorate the pressure from their huge housing overcapacity. It has told its commercial banks to set mortgage rates at "reasonable" levels and grant housing loans more quickly, especially for first time buyers. That Chinese property slowdown has the Aussies expecting to feel the consequences.

On the exchange rate, we start today with the NZ dollar noticeably higher at 86.7 USc, the Aussie is at 92.4 AUc. The TWI is now at 80.6. Against the European currencies we are a lot stronger. We are at 63.3 euro cents which is a 12 month high and against the English pound we are at 51.7 pence the highest in a month.

If you want to catch up with all the changes yesterday, we have an update here.

The easiest place to stay up with today's event risk is by following our Economic Calendar here »

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5 Comments

by Andrewj | 15th May 14, 8:19am 1400098740

meanwhile back in the States, land of the free and the high.

The Free Market At Work: Pot Prices Down From $100 to $25/Kilo In Main Mexican Drug Region

The Washington Post reported on Tuesday that pot farmers in the Sinaloa region have stopped planting due to a massive drop in wholesale prices, from $100 per kilo down to only $25. One farmer is quoted as saying: “It’s not worth it anymore. I wish the Americans would stop with this legalization.”

http://davidstockmanscontracorner.com/the-free-market-at-work-pot-price…

by Andrewj | 15th May 14, 8:20am 1400098849

In fact, China is a grotesque economic aberration that bears no relationship to prior economic history or any conventional economic models-–not even to the export-mercantilism model originally developed by Japan, and which has now proven itself wholly unsustainable. Instead, China is a nation that has gone mad building,speculating and borrowing on the back of a credit bubble so monumental (and dangerously unstable) that its implications are resolutely ignored by observers deluded by the notion that China embodies a unique economic model called “red capitalism”.

But when a nation’s debt outstanding explodes from $1 trillion to $25 trillion in 14 years, that’s not capitalism, even if its red. What it represents is monetary madness driven by the state.

Occasionally a picture is worth a thousand words, and here’s one buried in a Financial Times story on China’s rapidly deteriorating housing market. It seems that during the two-year period 2011-2012, which was the peak of China’s much praised “aggressive” stimulus response to the Great Recession in the DM world, China consumed more cement than did the United States during the entire 20th century!

http://davidstockmanscontracorner.com/why-china-will-implode/?utm_sourc…

by Anarkist | 15th May 14, 11:17am 1400109430

For a more even handed account of the Chinese Real Estate market, read this.

Foreigners are the ones likely to be hit hardest by a reversal in the Chinese real estate market and the damage won't be as widely spread as the U.S. mortgage crisis as fewer banks are involved. And securitization is still in its infancy in China. Not many Chinese firms or individuals own the instruments so any harm done by the unwinding will be constrained to the large commercial banks. Besides the Chinese authorities are better prepared for the eventuality than the shambolic efforts by the U.S. governement to manage the U.S. banking crisis.

"According to Cushman & Wakefield, foreigners account for 43% of Shanghai’s commercial real estate sales....Hot money flow into Chinese real estate was around $119.5 billion in 2004, rising to $147 billion in 2007 and over $210 billion in 2009, according to government numbers compiled by Jianmao. "

"In China, the mortgage market is run primarily by “the big four” government banks: Industrial and Commercial Bank of China, China Construction Bank, China Agriculture Bank and Bank of China. However, at least 20 mid- to small sized private commercial banks are in the market, too."

Another problem that exacerbated the decline in US housing prices was leveraged banks and investment funds buying mortgage backed securities. This market exists in China, but is small by comparison. Chinese banks started their securitization practice in the late 1990s, and it is limited to the commercial banks. Very few investors have MBS’ or CMBS’ in their portfolios, Li says. “The domino effect may not be so significant if a financial crisis comes in China because of real estate,” he says.

"In the late 1990s, the bad loan ratio of the big four reached a maximum of 20%. The central government then established four “asset management firms” called HuaRong, XingDa, GreatWall and Oriental and then simply transferred those bad loans to these four new firms, making the big four clean again. Sound familiar?"

http://www.forbes.com/sites/kenrapoza/2011/04/22/why-chinas-property-bu…

In terms of productivity, the efficienciency revolution in China is a great untold story. Manufacturing employment in China has already peaked. Between 1996 and 2008, factory ouput grew by 70% while at the same time, labour inputs declined by 25%. So it doesn't matter if the population is in decline, because the Chinese manufacturing sector is becoming more productive and can even meet rising wage demands. Stuff will get cheaper and more people will be able to afford it, even in the developed world where incomes are flat or falling.

http://andrewmcafee.org/2012/09/mcafee-rapid-productivity-growth-us-chi…

by Andrewj | 15th May 14, 8:50am 1400100659

Deflation in the States

I'm not sold on the so-called seasonally-adjusted numbers, as you all know. So let's look at the un-adjusted categories.

Building material was up as it usually is in April; this is the start of construction season. But....

Furniture? Uh, what was that about building things? You don't want to live in them, do you? Probably not, because that category was down 7% sequentially.

Or how about electronics? Down 15%?!

Or.... food and beverages (flat), pretty-much, gasoline (up a bit but so have been prices), clothing (up slightly.)

Then there's general merchandise (down ~4%) and the one that nobody says will ever go down, "non-store" retailers (Read: Amazon.com) -- but it did, down ~5%.

Oh, and nobody can afford to get drunk any more either (down 4%.)

http://market-ticker.org/akcs-www?post=229006

by steven | 15th May 14, 10:04am 1400105078

Of course inflation pressures are building in goods, energy is expensive and that filters through to goods and their manufacture.

The trouble is that isnt inflationary unless ppl have more money, if they do not, and many do not then they have to spend less elsewhere....that is deflationary.

Meanwhile china etc has over-capacity....

things are not going to well me thinks when you dont cherry pick.

regards